Peter Dowd: It is, as ever, a pleasure to serve under your stewardship, Mr Howarth.
I want to talk about fulfilment businesses in part 3, clauses 48 to 59, and the annual report on powers in relation to third-party goods fulfilment businesses, or new clause 5. I will speak a little about the fulfilment business measures before addressing the specifics of our new clause.
We welcome the action and powers for HMRC to deal with the problems created by the difficulty in properly taxing and charging VAT on the profusion of small businesses trading online through platforms such as Amazon. They are not just problems for the Exchequer. Many small businesses find themselves outcompeted and outpriced by overseas traders, which not only have lower operating costs but artificially lower their prices by failing to pay VAT on the goods they sell to UK consumers through fulfilment houses based here. It is essential that we act to protect both the taxpayer in general and the thousands of small British businesses that are, as we have discussed, the lifeblood of our economy.
It is not just lower prices and running costs that present problems for our small businesses. I have dealt with casework from small businesses that found themselves severely disadvantaged when filling out their VAT returns when they were unable to obtain VAT receipts from either their overseas supplier or the fulfilment business in question. In one case, the reason for the problem was simple: there were no VAT receipts because the seller had not charged VAT, unbeknownst to that particular British business. The online fulfilment house involved simply washed its hands of the matter and blamed a third-party seller that it supposedly has no control or influence over. It is right that we bring our laws up to date and ask the huge online fulfilment businesses to take their responsibilities to our society seriously, assist the Exchequer in levying the proper taxes and stop hiding behind the excuse of separate businesses.
Many of the overseas sellers we are talking about could not and would not exist were it not for online retailing sites and the fulfilment services they provide. The business models are entirely based on the mode of operation laid down by the multinational online marketplace, which makes their businesses possible. Action has been too slow to deal with these problems, which have festered for far too long, but better late than never. We do not seek to hinder action on this at all and we welcome the broad sweep of these measures and other related efforts to address the problems that have grown up from online marketplaces and fulfilment houses.
New clause 5 seeks another review—this time on an annual basis—examining the working of these new powers and responsibilities so that Parliament can keep a check and a close eye on the problems around fulfilment businesses. It is an expanding market and business sector and we have to try to keep up with it. We hope that the new clause will prevent any future problems from festering too long and ensure that Her Majesty’s Treasury keeps a close eye on changing business practices in this field, which might threaten the Exchequer or, importantly, undermine small businesses.

Mel Stride: Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. The scheme will require that from 1 April 2018, fulfilment businesses in the UK that fulfil goods for traders based outside the EU must register with HMRC, keep certain records, and carry out robust due diligence checks on their overseas clients.
The fulfilment house due diligence scheme is part of a package of measures announced at Budget 2016 that will disrupt and deter VAT abuse by overseas traders who sell goods to UK consumers via online markets. To address the point raised by the hon. Member for Luton North, the measure is not one that requires lots of extra inspectors; it requires a different attitude and regime for the fulfilment houses that are facilitating this VAT fraud. We expect it to be effective in those terms, rather than needing large numbers of additional staff.
Together, these measures are expected to deliver £875 million for the Exchequer by 2021. Many overseas traders selling via online marketplaces import their goods en masse to fulfilment houses in the UK, in readiness to fulfil anticipated future orders from UK customers. Once imported, the fulfilment house businesses will store, pack and sometimes deliver these goods on their behalf. Currently, certain overseas traders do not comply with the obligation to charge VAT on their goods held at UK fulfilment houses, as the hon. Member for Luton North pointed out. This not only deprives the UK Government of a significant amount of revenue but allows these overseas traders to obtain an unfair competitive advantage over the honest majority of VAT-compliant businesses operating in our country.
Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. Clause 48 sets out that all UK fulfilment houses that fulfil goods owned by traders established outside the European Union will be within the scope of the new scheme. These are referred to throughout the legislation as “third country goods fulfilment businesses”.
Clause 49 sets out that, following commencement of the scheme, all third country goods fulfilment businesses in the UK will require approval from HMRC as a “fit and proper” person in order to continue operating legally.
Clause 50 outlines that HMRC will maintain a register of all such approved persons. It will publish such details from the register as it deems necessary to allow  counterparties, such as those in the express deliveries industry, to check whether they are dealing with a compliant fulfilment business.
Clause 51 enables HMRC to issue regulations outlining the conditions of registration and approval. Clause 52 provides HMRC with a disclosure gateway, which will provide taxpayers information to the fulfilment houses for the purpose of meeting the scheme’s obligations. Clause 53 sets out that it is a criminal offence for an unapproved person to carry out a third country goods fulfilment business and sets out significant but proportionate criminal punishments which can be administered against offenders. Clause 54 provides that goods stored on the premises of unapproved fulfilment houses are liable to forfeiture and can be seized by HMRC.
Clause 55 sets out the civil penalty contained within schedule 13, which may be imposed upon an unapproved person carrying on a third country fulfilment business. Clause 55 also allows for regulations to be made imposing civil penalties on all third country fulfilment businesses, whether approved or not, which fail to abide by the requirements of the due diligence scheme. This shall include failure to carry out appropriate due diligence checks or to take appropriate action as a result of those checks.
Clause 56 sets out that an appeals process will be available to persons who have been made liable to a penalty under clause 55 or schedule 13. Clause 57 confirms that regulations which shall be brought forth under the terms of this legislation will be made by statutory instrument. It also sets out that appeals can be made against decisions to revoke a person’s approval, or to impose particular conditions and restrictions upon their approval status. Clause 58 contains definitions of the key terms utilised in the legislation.
Clause 59 outlines that for the purpose of passing scheme regulations the legislation will come into force at Royal Assent. Clause 59 also makes provision for HMRC to decide upon appropriate dates from which components of this legislation relating to other purposes will come into force.
Taken together, these changes will make it more difficult for non-compliant overseas businesses to trade in the UK and will enable HMRC to identify and tackle them more easily. It is intended that the scheme registration window will open on 1 April 2018. Existing fulfilment house businesses should apply to register with HMRC by 30 June 2018. The changes made will impact upon all third country goods fulfilment houses in the UK. They will incur a one-off compliance cost for registration and familiarisation with the new scheme.
I welcome the opportunity also to debate new clause 5 tabled by Opposition Members. The new clause proposes HMRC report on the operation of the provisions of the fulfilment house due diligence scheme in relation to each tax year after its commencement, within six months after completion of that tax year. The Government believe that legislating for a review of these matters is unnecessary. The Government have already undertaken extensive consultation on this scheme over the last 18 months and they will continue to monitor the impact of the legislation. The fulfilment house due diligence scheme will disrupt and deter that abuse.

With this it will be convenient to discuss the following:
Amendment 7, in clause60,page75,line7,at end insert—
‘(1A) Regulations under sub-paragraph (1) must in particular require a person or partnership to record service charges separately from other income.’
This amendment imposes a duty on HMRC to require separate records to be kept of service charges.
Amendment 8, in clause60,page75,line7,at end insert—
‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available in a prescribed manner.
(1C) In sub-paragraph (1B), “prescribed” means prescribed by regulations.’
This amendment imposes a duty on HMRC to require separate records of service charges to be kept in respect of each employee and in respect of prescribed period to be made available in a prescribed manner.
Amendment 39, in clause60,page75,line7,at end insert—
‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available to those employees.
(1C) in sub-paragraph (1B), “prescribed” means prescribed by regulations.’
This amendment imposes a duty on HMRC to require separate records of service charges kept in respect of each employee and in respect of prescribed period to be made available to those employees.
Amendment 33, in clause60,page78,line19,after ‘day’, insert
‘no earlier than 1 January 2022’.
This amendment provides that the provisions for digital reporting in Clause 60 may not be brought into force before 2022.
Amendment 40, in clause60,page78,line20,at end insert—
‘(4A) No regulations may be made under subsection (4) until after 90 days after the Chancellor of the Exchequer has laid a report before the House of Commons which sets out—
(a) the steps which HMRC has undertaken to establish that suitable software is available;
(b) the results of the testing by HMRC and others of that software; and
(c) the reasons why mandatory use of the software is in the interest of HMRC and taxpayers.’
This amendment would require the Chancellor of the Exchequer to report on software suitability and testing before giving effect to the provisions of Clause 60.
Clause 60 stand part.
Amendment 34, in clause61,page78,line34,after ‘day’, insert
‘no earlier than 1 January 2022’.
This amendment provides that the provisions for digital reporting in Schedule 14 and Clause 61 may not be brought into force before 2022.
Clause 61 stand part.
That schedule 14 be the Fourteenth schedule to the Bill.
Amendment 35, in clause62,page79,line12,at end insert—
‘(5A) No regulations may be made under sub-paragraph (5) on a day prior to 1 January 2022.”
This amendment provides that the provisions for digital reporting in Clause 62 may not be brought into force before 2022.
Amendment 38, in clause62,page79,line12,at end insert—
‘(5A) But no regulations may be made by the Commissioners unless the conditions in sub-paragraphs (5B) to (5D) are met.
(5B) The condition in this sub-paragraph is that the first regulations may not be made until after the Commissioners have undertaken an assessment of the impact of the implementation of the provisions of those regulations on—
(a) small businesses that have limited technological connectedness,
(b) businesses in rural areas, and
(c) businesses that are likely to have been affected by the closure of HMRC offices.
(5C) The condition in this sub-paragraph is that the Commissioners have prepared an assessment of the likely effects of making regulations in the form of a draft which has been laid before the House of Commons by the Treasury.
(5D) The condition in this sub-paragraph is that the House of Commons has resolved that regulations should be made in the form of a draft laid in accordance with sub-paragraph (5C).’
This amendment would provide for implementation of the provisions for making tax digital in relation to VAT to take place only following a review of impact on specific groups and provision for regulations to be subject to approval by resolution of the House of Commons.
Amendment 36, in clause62,page79,line19,at end insert—
‘(6A) Regulations under sub-paragraph (5) may not impose mandatory requirements for businesses to generate quarterly updates.’
This amendment provides that any system for quarterly updates to be generated must not be mandatory.
Amendment 10, in clause62,page80,line13,at end insert—
‘(12) Before making regulations under sub-paragraph (5) and in any case within three months of the passing of the Finance (No. 2) Act 2017, the Commissioners shall lay before the House of Commons an assessment on the effects on compliance with the requirements of those regulations by small businesses of the United Kingdom’s withdrawal from the European Union.’
This amendment requires HMRC to publish an assessment of the effects on electronic VAT records requirements for small business of the UK’s withdrawal from the EU.
Clause 62 stand part.

Kirsty Blackman: The Scottish National party has previously raised concerns about the moves to digital reporting. It is not that we do not support the principle of moving towards digital reporting. We have been clear that we think this could be a positive move. The concerns that we have raised previously have been about the timing of the moves and the way in which smaller companies were expected to move to digital reporting first. The Minister, to his credit, has changed the proposed plans and come up with a much more sensible direction and timeline for moving to digital reporting than the Government previously suggested.
Our amendment highlights specific concerns about the move to digital reporting, which, despite the Government’s changes and moves, we still feel have not been adequately answered. The amendment deals with the impact on specific groups that we feel might be negatively affected by the move to digital reporting.
The first group is small businesses that have limited technology for connectedness. There are small businesses that do not make that much use of the internet. There are some coming through that are wholly internet-based, and for which it is very important; but some are still starting that are not technologically advanced and do not use the internet much. We are concerned about the impact on them of having to report digitally online,  in view of their access to technology. The businesses  in question are not only in rural areas; they may just  be run by someone who does not make huge use of the internet.
The second group is businesses in rural areas. In those areas in particular, even though commitments have been given by the Scottish and UK Governments about improving access to digital connectivity, at the moment, not everyone has a fast enough internet connection to enable them to access the relevant services. If it is mandatory for businesses to use online digital reporting, that will be a problem for those without access to adequate technology—particularly in rural areas. Areas in England are affected, as well as those in more remote parts of Scotland. I understand that there have been Government commitments to get people on to digital systems, but we are not quite there yet.

Stella Creasy: As ever, I am eager to serve under your chairmanship, Mr Howarth. I come to the Committee with a series of amendments on what digital reporting might offer us to resolve some of the challenges faced by employers and employees in our country. There are two issues in particular, which I will come to in turn, because as ever with the Finance Bill, they are technical.
First, I will deal with the treatment of the lowest-paid staff in our country—Office for National Statistics data show that, of all low-paid people, waiters and hospitality staff get paid the least—and what we can do to help them with their incomes. Secondly, I will look at how digitisation could help us to address compliance, which is one of the biggest issues for small businesses. To prefigure the Minister’s comments, I know he will say that that is for another Bill, but given how important it is for the systems to work together, I think this is an issue for this Bill. I hope he will bear with me.
I turn first to amendments 7 and 8—amendments 8 and 39 are identical—which concern the treatment of waiters and hospitality staff. Many Members may be familiar with campaigns on the treatment of tips, service charges and gratuities and with evidence showing that some employers were using those to top up people’s wages and to avoid paying the national minimum wage. Members might therefore be relieved that legislation was brought in to prevent that, but it has become clear that many employers still use tips, service charges and gratuities to avoid paying their staff properly. The amendments go to the heart of how we can address that.
In particular, Members might not be aware that people are supposed to pay tax and national insurance on their tips. If an employee is paid their tips through a tronc, where their employer collects the money usually using an online system, which is what we are debating today, the employer is supposed not only to pool the  tips and share them out—after all, I think we would all recognise that as well as the person who serves a meal, the people who work in the kitchen deserve recognition of their work—but to check that the employee had paid national insurance and tax.
I do not know which restaurants Members eat at or which hotels they stay in, but if they were to go to Nando’s, Jamie Oliver’s or Pizza Express, they would be given the opportunity to pay their tip electronically by credit card, which a tronc scheme would pick up on.
Some employers pass that money on in full to staff, subject to national insurance and tax, while some charge a massive surcharge and, in doing so, dip into that money for their own purposes. A restaurant called Turtle Bay in Walthamstow was charging employees 3% of an evening’s total sales on tables and telling them that they would get than money back in tips while using it to fund its recruitment and training charges. Indeed, I supplied the Minister with a copy of the contract specifying that employees had to pay that charge. That is not a unique situation.
There is a particular concern about how tronc schemes are being used not only to lower wages and, therefore, pension obligations, but to scam employees for the money that they have earned through their good service and skills. HMRC guidance E24—I did say this was going to be quite technical—says that where a tronc is run genuinely by the staff rather than by an employer, they do not have to pay national insurance, even if the scheme is run through the payroll. We now have widespread evidence of employers using that to offer lower wages to staff, claiming that they can make the money back in the tronc, or using that money to subsidise the wages of restaurant management, rather than paying them a fair wage and recognising the service charges that staff have collected.
To give one example, a scheme was introduced in two workplaces. The staff were told that a tronc scheme was being introduced and that they would be entitled to a fixed-income share of the service charges as part of that arrangement, as long as they signed up to an agreement saying that their hourly rate of pay would be cut to the basic national living wage. The scheme was sold on the basis that they would get an additional guaranteed income that would not be subject to national insurance. However, that meant most of the staff were forced into taking a pay cut in order to get their tips.
Unite and the GMB have done a lot of work on representing people in the sector and they give the example of a sous chef who was offered a salary of £28,000 per annum and accepted the position on that basis. When he received his contract, he saw that his actual salary was £16,000 and he was told not to worry, because the remaining £12,000 would be guaranteed as a fixed income generated by the tronc scheme. I am glad that the hon. Member for Hitchin and Harpenden looks shocked at that.

For those Members who are VAT geeks, that provision is in articles 170 and 171 of Council directive 2006/112/EC, the prime VAT directive. I will, of course, pass that detail on to Hansard. The detailed rules are in Council directive 2008/9/EC. That is implemented in our own domestic legislation, in section 39 of the Value Added Tax Act 1994 and regulation 20 of the Value Added Tax Regulations 1995. In practice, that means that each European state is obligated to make a VAT refund. Obviously, there are rules on that, but it works pretty straightforwardly through an online electronic system, which is why it is relevant to the charge under discussion. I can see the Whip wondering where I am going with this, but there is a direct connection.
A similar scheme applies across the EU to businesses that are not established in the EU. That is the 13th VAT directive, which is implemented by section 39(2)(b) of the 1994 Act and is a more complicated system. The amendment is simple. When we leave the EU, we will no longer be able to rely on the simplicity of the intra-country VAT collection scheme that has helped businesses in Britain to trade and provide services, particularly in Europe. We will, therefore, need to move to the 13th directive, or we may move to something else. The customs White Paper, for instance, mentions an “innovative” scheme, but I am pretty sure that other countries, for which the intra-country scheme works well, would not be particularly willing to undertake such innovation.  I think they would be happy for us to move to the  13th directive.
I am concerned that there is a lot of evidence that the 13th directive and its administration is not very effective for countries outside the EU. In particular, the 13th directive states that member states must refund VAT to foreign traders. It also states:
“Member states may make the refunds…conditional upon the granting by third states of comparable advantages regarding turnover and taxes.”
One could argue that the Bill’s introduction of an online electronic system provides a comparable advantage, but my amendment asks the simple question being asked by many businesses, including local businesses in my constituency, which are starting to panic about how they will manage their VAT returns in future. How will the proposed electronic scheme fit in with regard to both the current regulations relating to intra-EU VAT refunds and the 13th directive?
Having looked at the Minister’s document, I am concerned that, although it talks a lot about what the UK will do, it does not talk a lot about the 13th directive and what it will mean for British businesses. Page 19 refers to contingency in case there is no deal—of course, we all know that that is a sensitive question for the Cabinet—but what British businesses need to know now is, if they are going to continue to trade in Europe, how they can do that in a cost-effective and red tape-free way?
One of the more bizarre elements of Brexit is that we seem to be arguing about red tape as though the other side wants more of it, and those of us who wanted to stay in the European Union are bad for wanting less of it. This issue is a great example of that challenge, where being part of the European Union had simplified a process for British businesses. A quarter of FSB members have said that the introduction of any tariff or complication with trading with Europe would put them off trading altogether. We need this Bill to match what is going to happen in future, so that businesses using an online system will not have to change it very quickly as a result of the rules of the 13th directive implemented by other countries making it harder for them to use.
If the Minister will not accept my very simple amendment asking him to set out just how this Bill will impact on the 13th directive, will he commit to discussing with British businesses what the directive might mean for them in terms of VAT compliance and recouping their costs, and what the consequences for them will be in terms of administering the scheme? All small businesses in our constituencies that are looking at that future trading relationship will want to know how much additional paperwork they are going to get, and they deserve an answer.

Peter Dowd: I will to speak to clauses 60 and 61, schedule 14 and clause 62 together, as they represent a package of measures that would introduce powers and regulations surrounding digital reporting and record keeping for both VAT and income tax.
The Opposition’s concerns about the Government’s plans for making tax digital are well-versed. We raised them on Second Reading of the March Finance Bill, before they were dropped, and raised them again in the debate on the Ways and Means resolution for this Bill, as well as on its Second Reading. We fully support digitalised tax reporting, which we can all agree has the potential to drastically reduce the amount of time individuals and business owners will have to spend filling out long and complicated tax returns. We could also free up some of HMRC’s time, so that it is better spent clamping down on tax avoidance.
The benefits of the technological tax-reporting revolution that will happen in the UK in the next decade are not in dispute. What we are debating is the question of when it  will be rolled out and under what circumstances. The Government have already shown that they are willing to listen to the Opposition and others on this important issue. It is clear that the concerns we expressed throughout the general election campaign were heard, and they perhaps helped lead to the Treasury’s announcement over the summer that it would delay the introduction of digital reporting of VAT until 2019.
The Minister also announced the delay in when businesses would have to provide quarterly digital records until at least 2020. However, while such things are acknowledged and welcomed, they represent only a short pause in the Government’s plans and they do not address the wider problems with the timetable, which many consider to be a little rushed. All the stakeholders to whom we have spoken in the business sector and the tax community over the past few months continue to raise deep concerns about their ability to be ready for digital reporting of VAT, particularly as it will come when Britain will be leaving the European Union.
Owners of small and medium-sized businesses are already worried about the stark changes that they are faced with making in 2019 to prepare for Brexit. They are concerned about the possibility of a no-deal scenario and the overnight effect that would have on costs and supply chains. There is also the potential introduction of tariffs and the impact on staff who are EU citizens. It is not unfair to say that the Government have continuously failed to provide any certainty on those points, so it is little wonder that business confidence is pretty low, notwithstanding the Minister’s performance and attempts to push that up.
To further burden businesses with the cost of digital reporting will only make matters worse for many struggling businesses. What is more, few people inside or outside the Government believe that HMRC is actually ready. It feels like the Government believe that making tax digital is some holy grail that will allow HMRC to operate with less funding and fewer resources. In fact, we have seen little to no evidence of how much it will cost to train HMRC staff on the new software. We have yet to receive any reports of the pilots that have been run. To the best of my knowledge, HMRC has the same problems as many of the businesses that will be required to begin digital reporting in 2019. It is a distraction and depletion of the resources that are having to be focused on Brexit.
Those concerns are echoed by tax professionals, such as the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation, which both believe that the current timetable is unrealistic and unworkable for HMRC and the business community. That is why the Opposition propose delaying digital reporting for VAT and income tax to the end of the Parliament in 2022. Hope springs eternal in relation to the date of the next election, I suspect. The delay to digital reporting would give HMRC and small and medium-sized businesses the time they need to prepare adequately and to properly implement new software in their businesses.
If the Government are to stick to their 2019 timetable and ignore our very reasonable request for a delay in the implementation of digital reporting until the end of the Parliament, there must be adequate time to properly test and pilot the software, because that is a key element. So far there is little evidence to suggest that the Government will meet their target to have the software fully tested  and ready to be implemented by 2019, but the Minister may be able to reassure us on that point. He has said that the Treasury aims for a pilot programme to be tested in spring 2018, but if that timetable comes to fruition, it will not give businesses enough time for a full cycle of four quarterly VAT updates to be submitted before April 2019.
I am also aware that HMRC began a small-scale income tax pilot on 3 April 2017. My understanding  is that the intention was gradually to increase the  number of businesses admitted into the pilot, so that eventually several hundred thousand businesses would be involved. However, that has not happened and the income tax pilot is still operating on an extremely small scale, with fewer than 50 businesses taking part, as I understand it.
The question of whether the software will be  properly piloted and available to businesses before the implementation date is at the heart of the Opposition’s concerns. That is a legitimate operational concern, which is why amendment 40 would require the Chancellor to report on software suitability and testing before giving effect to making tax digital provisions.
Our greatest difference with the Government on digital reporting is the defined need for quarterly reporting. In our manifesto, we made it clear that we would permanently exempt small businesses that were below the VAT threshold from quarterly reporting. We recognise the huge administrative burden that quarterly reporting would place on them, as well as the added cost.
While quarterly reporting may benefit some types of businesses—no one suggests it would not—overall, it is unnecessary and we see no reason why it should be mandatory. That is why amendment 36 would ensure that it remains optional.
Digital reporting, if handled in the correct manner and implemented gradually, has the ability to free up the time of business owners and HMRC. It would change the way people report taxation for decades to come. However, the Government’s current timetable risks bringing with it chaos and confusion, unless the concerns of the business community are fully addressed.
It feels as though the Treasury is rushing through these changes because it has already pocketed the revenue that it believes these measures would raise. I hope the Minister takes this point in the spirit it is intended: he would rather invite further burdens, in my view, and add strain to small and medium-sized businesses than acknowledge that delaying making tax digital would add to the growing black hole in public spending. We are not quite sure where that stands at the moment.
Genuinely, and point scoring apart, the Minister needs to recognise that few people believe that the Government’s timetable is realistic. Even fewer businesses, both large and small, want the extra and unnecessary burden of quarterly reporting. There has been little in the way of evidence so far that the pilot programmes and software will actually be ready.

Mel Stride: These clauses introduce the requirements for making tax digital for businesses. That is major step in our journey towards a system in which technology makes it easier for businesses to get their tax right. The majority of businesses, as we have heard, want to get their taxes right but, none the less, make honest and  avoidable mistakes in fulfilling their tax obligations. Not only does that cause them concern and frustration when HMRC intervenes to put it right, but taxpayer error and failure to take reasonable care cost the Exchequer £8 billion a year.
VAT has been online since 2010 and more than 98% of registered businesses already send VAT returns to HMRC in this way; many do it themselves, some use agents to do it for them. Making tax digital will be voluntary for income tax and national insurance contributions for those who fall below the VAT threshold, even if they are registered for VAT. Hon. Members will note that provisions in the Bill relating to income tax—that is, clauses 60 and 61—cannot enter into force until an appointed day order is made by the Treasury. The Government have committed that that will not happen before 2020.
The hon. Member for Bootle very generously welcomed, as did other Members, the timetable changes that I announced in July. The hon. Gentleman suggested that we have not gone far enough. I would point him to the remarks of Mike Cherry, the FSB chairman, who welcomed the delay that I announced in July. He said that it makes
“the roll-out of the changes far more manageable for all of the nation’s small firms”.
Many similar comments were made by businesses and organisations representing businesses at that time.
Let me set out in detail a few aspects of the legislation for making tax digital and we can pick up some of the points made by hon. Members. Clause 60 provides the framework for a future extension of making tax digital to income tax and class 4 national insurance. It sets out to whom the rules would apply—broadly, any unincorporated trading business or landlord with turnover of more than £10,000 a year. Clause 60 provides that the regulations made using these powers cannot mandate the provision of information more frequently than once a quarter, so we can be very clear on the frequency issue in the legislation. That output will be generated automatically by software and sent at the press of a button to HMRC. There will be no requirement for businesses to pay income tax or national insurance alongside their final year update.
Clause 61 introduces schedule 14, which makes consequential amendments to the existing income tax administration rules. Clause 62 amends the powers in the VAT Act 1994, enabling HMRC to amend the existing VAT regulations to provide for digital record keeping and information reporting.
The hon. Member for Bootle has suggested a number of amendments to clauses 60 to 62. He also asked several questions relating to those clauses in Committee last week, which I hope to address today. Amendments 33 to 35 would have the effect of delaying making tax digital implementation until 2022 at the earliest. Having consulted widely and received feedback both from external stakeholders and Members, the clear message was that, although digitising tax was a positive step, some had concerns about the scope and pace of change.
As many Members have reflected today, on 13 July we announced significant changes to the scope and timetable for making tax digital, giving 3.5 million businesses more time in which to prepare. Businesses will not now be mandated to join making tax digital until April 2019, and then only to meet the VAT obligations.  Businesses with a turnover below the VAT threshold will be exempt from making tax digital altogether. That change was widely welcomed—as I pointed out, it seems a realistic path to implementation. Trade representative bodies and other stakeholders who previously expressed concerns are now engaging with HMRC to ensure a successful roll-out of the programme. HMRC has already started piloting the changes for income tax, allowing for at least three years of testing on a voluntary basis before mandation.
Changing the timetable further would create uncertainty for businesses and undermine our ability to pilot the changes properly. Digital software is increasingly part of the way that businesses operate; further delay to making tax digital would result in increased divergence between the way that businesses run themselves and the way they do their tax. Making tax digital is about ensuring that businesses get their tax right and helping HMRC to address the £8.7 billion tax gap. We need to balance ensuring that businesses and agents have time to prepare with ensuring that everyone can experience the benefits of doing tax digitally at the earliest opportunity. I am confident that the current timetable strikes the right balance.
The hon. Member for Bootle also tabled an amendment to stipulate that there should be no requirement under MTD for mandatory quarterly updates for VAT. Under our current plans for MTD for VAT, no business will be required to provide updates to HMRC more frequently than they do now. Most already submit VAT returns quarterly and they will provide the same information with the same frequency. The difference is that the updates will be sent to HMRC from digital records.
The hon. Gentleman’s final amendment would require my right hon. Friend the Chancellor to lay a report relating to the software used for MTD before the House. HMRC has begun piloting MTD services and intends to test the system extensively. That pilot will be used to test the range of software products available to businesses. HMRC is working with the software developer industry and others to ensure that products are available to businesses and agents at a range of different price points. As it emerges from the pilots, HMRC will publish information about available software products on gov.uk to enable businesses to choose appropriate products.
The hon. Member for Walthamstow has tabled three amendments to clause 60—I would expect no less than three; it is very modest of her, on this occasion, though I think one amendment was submitted twice—which seek to ensure that businesses record service charges separately for each employee. As the hon. Lady knows and has pointed out, the Department for Business, Energy and Industrial Strategy has consulted on service charges on these matters. The issue is of course very important: I know that she has pursued it for a long time and given an eloquent and lengthy discourse on many of its byways and alleyways. As perhaps was demonstrated by the intervention of my hon. friend the Member for Hitchin and Harpenden, these particular matters are complex. It is the Government’s contention that this is not the right forum in which to start trying to address, tempting though it is, through making tax digital, some of what I accept may be iniquities in the operation of companies’ tips and service charge systems. We have to wait for the results of the BEIS consultation.

Mel Stride: I thank the hon. Lady for her further point. I guess it comes down to interpretation. It seems to me that if it is not reasonably practical for a person or company to use electronic communications, the reliability of the service—another way of describing the point she raised—would be an important part of the judgment that would be made.
The clause continues with “Further exemptions”. Proposed new paragraph 15(1) states:
“The Commissioners may by regulations make provision for further exemptions.”
New paragraph 15(1) states:
“The exemptions for which provision may be made include exemptions based on income or other financial criteria.”
There is therefore a recognition in the Bill that not only do we need to get it right for the current circumstances, but we need the flexibility to be ready for any circumstances that might present themselves and which we have not considered at this stage. Those would need to be addressed further down the line.
For those who can go digital but require additional assistance, HMRC will continue to provide a diverse range of digital support, including webinars, helplines and YouTube videos, to help them meet the requirements of Making Tax Digital.
The hon. Member for Aberdeen North also seeks to provide for a phased implementation period, with the commencement of each new stage requiring approval by the House. We have already revised the implementation to start with businesses that report quarterly, and stakeholders are operating on the basis of the new timeline. We are phasing in the implementation by piloting the changes and by starting with mandation only for VAT and those above the VAT threshold. The secondary legislation required to lay out the detailed operation of MTD will be laid before the House in due course, offering Members a further opportunity to scrutinise our plans and consider our proposals.
The hon. Member for Walthamstow has tabled an amendment to require HMRC to publish an assessment of the effect of our exit from the European Union on MTD for VAT for small businesses. HMRC wants to  give businesses plenty of time to adapt to MTD and is allowing for a full year of piloting the changes before mandation applies and before the UK leaves the European Union. If businesses wish to begin keeping their records digitally before we leave the EU, they will be able to do so.
The hon. Lady raised specific issues in respect of VAT and the 13th directive. The Government do not consider there to be an MTD issue here. MTD is about how records are kept and reported, rather than the nature of the VAT regime itself. The regulations will be consistent with the requirements of the 13th VAT directive, but if she has specific concerns, HMRC will be happy to look into them.